Trading Guide: Is it a ‘Dead Cat’ bounce or a sustainable rally?

Anand James, Chief Market Strategist at Geojit Financial Services decodes how investors should prepare themselves for the holiday-shortened week.

By Monday, the Nifty50 had recovered 7.6% from the 8th March’s lows, and was seen fancying to reclaim 200-DMA placed at 16,974. Pic: Pixabay

Equity markets started the week on a positive note amid geopolitical concerns. Expectations of a rate hike by the US Fed has also toned down and a 25-bps hike for its March 16 rate announcement is expected.

This is with full knowledge that Federal Open Market Committee (FOMC) has the carte blanche to go on an aggressive hike spree in the coming months.

Anand James, Chief Market Strategist at Geojit Financial Services decodes how investors should prepare themselves for the holiday-shortened week:

TRENDING NOW

Over the last few months, fear has tapered down and the Russia-Ukraine turmoil did ensure that markets took its eyes off to focus on much larger issue.

Having braved the turmoil led collapse, equity markets’ focus is back on the US Fed, and markets cannot just ignore the prospect of easy capital being taken away.

Meanwhile, crude oil, despite a 20% fall from the peak, is a significant 46% more expensive than it was when Fed met last in December.

Data released on Monday said that of India's WPI grew 13.11% in February, after rising 12.96% during the month of January. Also, CPI rose to 6.07%, which is over and above the RBI threshold of 6%.

Trade Set up

By Monday, the Nifty50 had recovered 7.6% from the 8th March’s lows, and was seen fancying to reclaim 200-DMA placed at 16,974.

This was on the backdrop of strong breadth seen in Nifty and Nifty Bank but the same enthusiasm was not visible along the broader market which was still seen huffing and puffing, save select names and sectors.

The NSE 500’s breadth was 46, while 52% of small caps closed in the red. So, is this a sign of exhaustion?

The reclaiming of the 200-DMA is usually done within the span of a few days between Nifty 50 and other indices, making the present move a bit unusual.

Now, the small-cap index is a good 4% lower the key moving average (MA), and there is a lot of catch up to do. The disclaimer here is -- this statistic has a higher success on occasions when the downtrend is steep and prolonged, which is not the case with Nifty’s recent breach of the 200 DMA.

In a way, this also hints that we are not yet clear of the doldrums and a more prolonged downtrend could be in store, as in 2018, or in 2019 where there were multiple cross overs of 200 DMA.

But, what is certain is that, even on those occasions, the upside crossover do give opportunities for small and mid-caps to run up reasonably, which rules out the need of resigning the present move as a “dead cat bounce”.

More than 26% of the mid and small cap stocks have run up atleast 10% from the 8th March lows. And only 7% of the NSE 500 stocks have given sub zero returns during this period, suggesting that the risk appetite has improved across board.

Meanwhile, Nifty 50’s foray into the 200DMA vicinity is headlined by two or three stocks so far. As more index stocks play catch up, Nifty should easily levitate into the 17300-18000 band. But first, expect 16960 to ask questions.

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)

TAGS: